Homebuyers Guide Homeownership

What is PITIA?

I’ve mentioned before how the journey to homeownership feels like a crash-course in acronyms. Well, here’s another to add to the list: PITIA.

No, it’s not a wrap for falafels or the 11th step of your Korean skincare routine. PITIA refers to the various components of your monthly mortgage payment. Each month, your mortgage payment goes to a lot more than just your principal (although that’s the “P” in PITIA). All together, PITIA stands for principal, taxes, interest, insurance, and association dues. 

Let’s break it down, shall we?

All together, PITIA stands for principal, taxes, interest, insurance, and association dues. 

First up, what’s a mortgage payment?

After you receive a mortgage loan, you’re responsible for paying the loan back in full, plus interest. That usually meters out into a set monthly payment you’re required to pay. The amount you’ll pay each month varies—it depends on the size of your loan, your interest rate, and the term or length of your loan, such as whether you opted for a 15-year or a 30-year mortgage.

Someone who took out a large loan on a 15-year term will have higher payments, for example, than someone who took out a small loan over the course of 30 years. As a general rule, the higher the interest rate and the shorter your term, the higher your monthly mortgage payment. 

P is for Principal

Principal refers to the actual amount you borrowed from a lender. If you received a mortgage for $300,000, your principal is $300,000. Simple, right? But remember, that doesn’t include interest (see below).

When you first start off as a homeowner, you might be shocked to see how the amount owed doesn’t seem to dwindle down much even after a year or two of making payments—I know I was! That’s because most of my payments right now go toward the interest.

However, I take comfort knowing I’m paying more and more of the principal off each month. And when I get toward the end of my 30-year loan term? Most of the money will go toward paying the principal.

It’s a process that takes time and can feel overwhelming in the beginning, but having a grasp on PITIA is crucial to understanding how those monthly mortgage payments shake out. 

I is for Interest

Interest rates are an incredibly important component for most people looking to buy a home—that’s why it’s always big news when average interest rates climb or drop.

Forget “foreclosure”—“interest” might just be the most maligned word in real estate. That’s because it can feel like all of your monthly mortgage payment goes to interest. And in the first few years of homeownership, you’re right. Interest refers to what your lender charges for loaning you the money. 

Interest rates are an incredibly important component for most people looking to buy a home—that’s why it’s always big news when average interest rates climb or drop. You can always check the current interest rates but remember: These numbers fluctuate because they’re determined by the Federal Reserve.

The higher your interest rate, the more you’ll pay your lender beyond the principal amount. You can reduce interest by making extra payments on your loan or making larger payments each month, although, for many new homeowners, this isn’t always possible. You can also take advantage of lower interest rates by refinancing, which means getting a new mortgage to replace the original. 

Unless you’re purchasing a home outright and won’t need a loan at all, there’s no way to avoid interest. But you can try to time the purchase of a home with low-interest rates, and you can also put at least 20% down to avoid the additional cost of private mortgage insurance or PMI.

T is for Taxes

Like interest, the tax on your property is governed by forces outside of your control. Property tax rates are assessed by your local government and used to fund public schools, municipal services, first responders, and other important facets of your community.

You can feel good about paying property taxes—you’re a contributing member of society! But, it’s easy to feel frustrated when local governments look to property owners to fund government services, resulting in climbing tax rates year after year.

Talk to your real estate agent about tax rates before you close on a property to get an understanding of what to expect, including your state’s formula for assessing tax rates and property values. In my own neighborhood, I pay not only county taxes but also city taxes—something I wasn’t aware of before closing. (Ultimately, it wouldn’t have changed my decision, but it was something I wish I knew about!)

So, are taxes always part of your mortgage payment? Not necessarily. This depends on if you task your lender with paying taxes, or if you pay them yourself. 

I personally chose to let my lender handle twice-yearly taxes on my property by using an escrow account, where I pay a set portion of my monthly mortgage payment to go toward a separate account that funds my twice-annual tax payment.

This means I pay a nominally higher lump sum to my lender each month, but I’m not hit with a large tax payment, and I don’t need to think about things like when my property taxes will be paid. Instead, my lender automatically sends the payments on my behalf using the money in my escrow account.

I is for Insurance

Homeowners insurance—also known as property insurance—is required for people who have a mortgage. This protects you (and the lender) in the event of a natural disaster or other events—although note you might also need additional types of insurance, like flood insurance

As for insurance rates, that varies greatly depending on where you live and the type of coverage you want. 

If you choose to use an escrow account, detailed in the “taxes” section above, part of your monthly mortgage payment will fund that account, which in turn, lenders will use to automatically pay insurance premiums on your behalf. As for insurance rates, that varies greatly depending on where you live and the type of coverage you want. 

There’s also another kind of insurance that applies to many buyers. Anyone who isn’t able to put down 20% will be subject to something called private mortgage insurance, or PMI—which, in a nutshell, is a type of insurance designed to reimburse a mortgage lender if the buyer defaults on the loan and the foreclosure sale price is less than the amount owed by the lender.

A is for Association Dues

For many people, “PITI” might be the only part of the acronym they need. But the “A” in PITIA refers to association dues. If you purchase a property with a homeowners association, like a condo or home in a gated or active adult community, you’ll be on the hook for monthly payments to help maintain and ensure access to amenities and services like landscaping

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